Car companies turn to hybrid pensions, are others to follow?

While it will be many years before the full impact of the pension changes at the Detroit Three is felt, what is certain is that the current generation of autoworkers will be the last to retire with a full pension as young as age 48

Recent negotiations between the Canadian Auto Workers and the Detroit Three have led to a pension plan that for the first time shares the risk between the auto companies and their workers.

While it will be many years before the full impact of the change is felt, what is certain is that the current generation of autoworkers will be the last to retire with a full pension as young as age 48 which was possible under the old “30 and out plans.”

Existing workers will keep their current defined benefit plan but the defined benefit pensions for new hires will be only half what the old plan produced. To fill the void, new hires will be enrolled in a defined contribution pension plan. This defined benefit-defined contribution arrangement is referred to as a “hybrid” plan.

What is gone is the incentive to retire early. The amount of pension employees can buy with their account balance in a defined contribution plan grows with age but it may not be sufficient to retire on until employees are well into their 60s.

[np-related]

What is still to be seen is whether this type of hybrid plan becomes the template in other collective bargaining situations.

Much of the existing workforce at the Detroit Three is on the verge of retirement. The CAW told Financial Post’s Scott Deveau last week that 90% of GM’s 8,200 Canadian workers will be eligible for retirement in the next decade and 40% of Ford and Chrysler works can expect the same thing.

The average retirement age in Canada has been climbing slowly since the late 1990s (it is now age 62) and defined contribution plans like this one will accelerate the trend towards later retirement. The fact that employees will need to work longer is considered to be a good thing for the economy since labour force projections suggest we will suffer a worker shortage in as little as a decade.

The hybrid plan negotiated by the automakers and the CAW is not totally new. A very similar hybrid plan was put in place by Air Canada and its flight attendants almost a year ago.

The difference is that Air Canada’s very survival was at stake while this time the hybrid plan was negotiated while the company and the economy were in a relatively normal state. The new normal clearly is not what it was before the financial crisis. Global competition is forcing Canadian companies and their unions to accept a new reality.

From a plan design perspective, a hybrid plan is complicated, which makes it difficult to administer and difficult to communicate. An alternative type of hybrid is the target benefit plan which looks very much like a regular defined benefit pension plan but the employer’s cost is fixed which exposes plan members to a reduction in pension if investments underperform.

In spite of this, target benefit plans are considered by most actuaries to be a better option than defined contribution plans. Unfortunately, the provinces have been slow to pass the necessary legislation to permit these plans, even though government-appointed task forces in Ontario, B.C., Alberta and Nova Scotia recommended target benefit plans more than four years ago.

What may jump-start target benefit plans in the private sector is if governments move to implement them for their own workers within the relatively generous public sector plans. Some noise has been made to this effect in recent government pronouncements and we may see further developments this fall.

Fred Vettese is chief actuary at Morneau Shepell. He is the author of The Real Retirement, co-written with Bill Morneau, to be released in December.